Why Yahoo Might Sell Off Its Internet Business

Yahoo's board of directors is reportedly preparing to discuss whether the company should sell off its ever-floundering Internet business. That includes its Web portal Yahoo.com (how retro!), Yahoo News, Yahoo Mail, Yahoo Search—pretty much everything that most Americans associate with Yahoo as a going concern.

Sound crazy? It's not, really, at least if you come at it from the viewpoint of an investor. Yahoo has been looking for the most efficient, inexpensive way to break up its odd assortment of parts. This might turn out to be it.

In the eyes of Wall Street, Yahoo's core business, which is basically a king-sized version of every struggling online media operation combined with more ad tech and a search engine not named Google, isn't worth very much.¹ Most of the company's value is instead tied up with its 15 percent stake in Alibaba, China's king of online commerce, and Yahoo Japan. Investors tend to think those assets would be more valuable if they were freed from the struggling Web properties. So Yahoo has been planning to oblige their desires by spinning off its Alibaba stake into its own company. 

That plan recently hit a speed bump. Yahoo has been trying to structure the spinoff as a tax-free transaction; if it just sold the shares outright, it would owe billions to the government. But when the company ask the Internal Revenue Service for an opinion about its plan, the agency declined to say whether Yahoo would face a tax bill. This was a bit worrisome, since some IRS officials have questioned whether the kind of deal Yahoo is contemplating—in which a bunch of heavily appreciated assets like stock are packaged together with a tiny operating business—should qualify as a tax-free corporate spinoff, since it basically looks like an end run around capital gains taxes. Still, Yahoo was planning to go ahead with the deal anyway.

Enter the activist investors at Starboard Value LP (whom you might recall from their hilarious slide-deck presentation about Olive Garden's culinary crimes). After previously agitating for the Alibaba spinoff, the fund reversed course, arguing in a public letter that due to the IRS's silence, the risk that investors would be hit with a massive tax bill was too great. Instead, they suggested that Yahoo sell off its core businesses, which aren't doing so stellar anyway, leaving behind a company containing the Alibaba stake and Yahoo Japan, along with a bunch of cash.² The sale proceeds would be taxed, but potentially less than if the IRS decided to take a cut of the proposed spinoff. In the end, it would accomplish the same goal of dicing up Yahoo, just through different means.

Who might buy Yahoo.com? The Wall Street Journal suggests it would probably be a private equity firm, meaning that the Web operations would be going private. I'm not sure how that would fly in Silicon Valley—how many top-level programmers actually want to work for a company that's been reduced to a private-equity rehab job?—but making sure the website has a thriving future isn't really the point here.

It's entirely possible the Yahoo board is merely batting this idea around to placate an ornery major shareholder and will eventually take its chances on the Alibaba spinoff. But as weird as it sounds, Yahoo selling off Yahoo really isn't that insane.

¹ You'll occasionally see analyses suggesting it’s worth less than nothing, though that's open to interpretation and probably not true, given that the board is credibly talking about selling off those properties for a positive sum of money.

² I'm just speculating here, but I'm guessing that the rump holding company would change its name, so as not to be confused with the old Web portal.